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Your Credit Score and Your Marriage

When a couple first starts talking about marriage, they often discuss their hopes and dreams, how many children they want, and maybe even finances to some extent. Few couples, however, talk about their respective credit scores. While it’s not the sexiest topic, your future spouse’s credit score could have a significant effect on the interest rate you receive when the two of you decide to buy a home in the future.

Aside from this, your significant other’s credit score is a good indicator of their financial habits, and could reflect a nasty habit of paying bills late, massive amounts of credit card debt, or even a past bankruptcy. Down the road, issues like this have a tendency to come back to haunt you, and can put a serious strain on both your finances and your marriage. So before those wedding bells ring, you may want to talk about your credit and what it could mean for your future financial decisions together.

Does My Spouse’s Credit Score Affect Mine?

Contrary to what many people believe, your credit score does not combine with your spouse’s after you get married, according to MyFICO, the consumer website of the Fair Isaac Corp., the creator of the FICO score (the most frequently used credit score). The two of you will continue to have the same credit score when married as you did when you were single. However, this doesn’t mean that you can always rely on the person with the highest credit score when taking out loans, or that your spouse’s financial moves won’t ever affect your score.

Along with evaluating your joint income, mortgage lenders will consider both you and your spouse’s FICO scores when you apply for a home loan, MyFICO explains. Another instance where your spouse’s credit affects yours is in your joint accounts. If you share credit card accounts with your spouse, and he or she maxes out those cards, maintains high balances on those cards, misses payments on those accounts, or makes other irresponsible financial decisions regarding your shared credit, it will affect your credit as well as theirs.

What Can I Do If My Spouse Has Bad Credit?

If you plan on taking out a loan, and your spouse has a bad credit score, your best options may be to see if you are eligible for the loan using only your income, or to simply wait until your spouse improves his or her score before pursuing the loan, according to Kiplinger’s Personal Finance. Remember that even if you have a credit score above 800, it may not be as effective as it should be in landing you a low interest rate if your spouse has a credit score below 600. Many couples work together to improve the credit score of the person with bad credit.

This process starts with ordering a credit score report to find out your starting point, and making a concerted effort to correct any mistakes in the credit report, pay bills on time, and keep credit card balances low. Most married couples who watch their credit closely and take steps to improve it will see positive results over time.

Your Credit Score and Your Job

The fact that your credit report has the potential to negatively impact your ability to get a job is unfortunate for many people who are trying to get back on their feet financially. After all, if you are trying to repair your credit after experiencing some financial setbacks, you probably need a steady income to do so. Then again, it’s more difficult to receive a steady income if the information on your credit reports keeps you from certain jobs in the first place!

Even so, this is the reality job-seekers face: it is perfectly legal in many states for employers to request your credit reports as part of the job screening process, provided you give permission to release the information, according to Forbes.com. Employers consider a job applicant’s credit report because it can be a strong indicator of an applicant’s ability to make solid financial decisions, keep their commitments, and meet deadlines. These qualities are particularly valuable for jobs in banking, accounting, or finance that involve handing other people’s money. In addition, the information on your credit report may also be valued in office management occupations that entail financial tasks.

Can Employers Access My Credit Score?

Contrary to popular belief, employers cannot access your credit score, but only your credit reports, according to BankRate.com explained. Therefore, a missed payment or two is less likely to affect their decision. Rather, employers will be looking for more serious concerns, such as a consistent pattern of missing payments, a loan default, or accounts going to collections.

Do Credit Checks Continue after You’re Hired?

According to a 2010 survey by the Society for Human Resource Management (SHRM), nearly 20% of employers conduct further credit checks and/or criminal background checks after employees are hired, stated BankRate.com. However, this is more common for jobs in which employees have access to confidential information and excellent character is of the utmost concern. You may also be asked to submit to a credit check when you are seeking a promotion or change of position, the article noted.

Practical Steps

Because your credit reports have the potential to affect both your ability to get a job, your ability to keep a job, and your ability to land a promotion, it will serve you well to keep abreast of the information on your credit reports, make sound financial choices, and take practical steps to maintain the highest credit score possible. On a regular basis, request copies of your credit reports and check your credit score to make sure they are accurate, correcting any mistakes you find. Last but not least, do everything in your power to pay your bills on time, keep your credit card balances low, and maintain other good credit habits.

Your Credit Score and Your Home Loan

One of the biggest financial decisions many people make in their lives is the decision to buy a home. Since homes require a significant financial investment, most people take out a home loan, or mortgage, to pay for their home. As it does with auto loans, your credit score can have a significant impact on the interest rate you receive from your lender, which in turn impacts the total amount you end up paying for your home over the life of the mortgage. In addition, individuals whose credit score is too low may not be able to receive a mortgage loan from most lenders, according to MyFICO, the consumer website of the Fair Isaac Corp. that created the FICO score (the most frequently used credit score).

How Do Lenders Use Your Credit Score?

When you submit an application for a home loan, the mortgage lender accesses your credit score to ascertain how much of a risk they are taking on by lending to you. You credit score starts with your credit report, which consists of the information provided by the nation’s three main credit bureaus ó Equifax, Experian, and TransUnion, according to BankRate.com. This credit report provides important information on your credit history, including how long you have had credit, whether or not you pay your bills on time, your available credit, and other pertinent information.

FICO uses the information from these reports, combined with their own formula, to come up with a single credit score within a range of 300 (lowest) to 850 (highest), BankRate.com explains. Individuals with high FICO credit scores generally receive lower interest rates and more loan choices, while those with lower scores receive higher interest rates and few loan choices.

The Financial Impact of High Interest Rates

Having a low credit score when applying for a home loan can mean both high interest rates and a higher monthly payment, affecting the home buyer financially in the short-term and the long-term. For example, as of July 2012, a person with a FICO score between 760 and 850 could receive an annual percentage rate (APR) of 3.136% on a 30-year fixed mortgage, resulting in a monthly payment of $1,287 for a $300,000 loan, according to MyFICO. In contrast, someone with a FICO credit score range between 620 and 639 could receive an APR of 4.725% on a 30-year fixed mortgage, resulting in a monthly payment of $1,560 for a $300,000 loan. As you can see, having a lower credit score can save you thousands each year, and result in significant savings over the life of the loan.

Credit Rates and Refinancing

After taking out an initial mortgage, many homeowners decide to refinance their homes, or replace their existing mortgage with another. Even with the up-front costs involved, this is often a good financial move for homeowners who want to capitalize on lower interest rates and lower mortgage payments each month. As with taking out an initial mortgage, your credit score plays a major role in getting a good interest rate.

The best interest rates on refinancing are available to individuals with credit scores in the mid-700s or better, according to MyFICO. The smartest move for many homeowners who are interested in refinancing is to ask their lender about the credit score needed to be eligible for the best interest rates, to take steps to improve their credit score, and to pursue refinancing after their credit score reaches the desired level. Once the homeowner has attained the credit score needed to refinance mortgage with the best possible interest rate, they can pursue refinancing with the knowledge that they are making the best possible financial move.

Your Credit Score and Your Credit Card

As you might imagine, how you use your credit card(s) has a significant impact on your credit score. To name a few examples, your credit score could be impacted when you cancel a card, when you ask for a credit limit increase, when you open a new line of credit, when you miss a payment, and when you maintain high balances on your card(s). At the same time, people who try to avoid these tricky credit issues by not having or using credit cards have other problems to contend with, such as lack of credit history. Your credit score without credit can make it difficult to obtain a loan. Rather than avoiding credit cards entirely, it is often smarter to educate yourself on how credits cards affect your credit score and to practice responsible usage of credit cards.

Can Cancelling A Credit Card Negatively Impact My Credit Score?

Cancelling a credit card can potentially have a negative impact on your credit score if by closing the account, you change your balances-to-limits ratio on your credit cards. How much you owe in relation to your total credit limit is a significant factor in determining your credit rating, and accounts for a whopping 30% of your score, according to Barry Paperno, a credit expert quoted in a BankRate.com article on the topic. So if you owe a significant amount of money on your credit cards and you cancel a credit card, that cancelled card’s credit limit no longer counts toward your total amount of available credit. This makes it appear that you are closer to maxing out your total amount of available credit, and can negatively impact your score.

Another reason experts discourage credit card holders from canceling cards is that you may lose your good credit history associated with that card over time. Once you pay off an account, it will only remain on your credit history for a maximum of 10 years before it is removed from your credit report by the credit bureaus, and may even be removed sooner by the credit issuer, the BankRate.com article explained. However, if you keep the account open, your good history regarding that card will remain for up to 20 years, which is good news for your credit score. Considering your credit history accounts for approximately 15% of your credit score, it’s no wonder experts advise credit card holders not to close accounts associated with a good history.

High Credit Limits and Your Credit Score

Along the same lines, asking your card issuer for a higher limit actually has the potential to improve your credit score. While the initial credit inquiry involved would entail a slight, temporary ding to your credit, receiving a higher credit limit can improve your balances-to-limits ratio, making it appear that you are not as close to maxing out your credit limit, according to Experian, one of the three major credit score agencies. Take care, however, that you do not take advantage of the higher credit limit by adding more debt, which not only puts you right back where you started with your overall credit utilization rate, but adds to your overall debt, reducing your credit score.

What Credit Card Behaviors Lead to a Good Credit Score?

Some of the best behaviors that lead to a good credit score include making your payments on time, using your card(s) once every six months so that don’t become inactive, keeping accounts open, and keeping your credit utilization ratio low, BankRate.com notes. In addition, credit card holders should be mindful of the impact of opening a new account (this dings your credit temporarily) and also be mindful that paying off your credit cards has a more positive impact on your credit score than paying off other loans. Last but not least, monitor your credit score report online on a regular basis to make sure to clear out any mistakes connected to your credit card(s), such as a record of a missed payment that you actually paid on time.

What Credit Score Do I Need for a Credit Card Approval?

One final consideration is the role your credit score plays in whether you can open a line of credit in the first place. In fact, your FICO credit score may determine whether you will even be issued the particular credit card for which you apply, according to myFICO, the consumer website of the Fair Isaac Corp., the creator of the FICO score (the most frequently used credit score). Credit issuers do not reveal their minimum credit score required for credit card approval because their competitors could use this information to undercut them, according to Forbes.com. While the exact credit score needed to get a credit card is unknown, applicants would do well to maintain a positive payment history, show diversity of credit, and have a satisfactory debt-to-credit ratio, the article notes.

Your Credit Score and Your Car Loan

One of the most common reasons for taking out a loan is to finance a car. Unfortunately, many consumers do not give a second thought to their credit score until the day they take out a car loan. A little preparation for this major purchase reveals that a person’s credit score is a vital factor in determining the interest rate that person receives on their car loan. Specifically, those with high credit scores receive better interest rates on their car loans than those with lower credit scores.

Why does the interest rate a person receives on a loan matter? Ultimately, this means that car buyers with low credit scores, and resulting high interest rates, could be paying hundreds more in interest charges over the life of the loan than they would if they had a higher credit score. By the time a car buyer is sitting at the dealership arranging financing, however, it’s usually too late for them to do much to improve their credit score. This is why it’s much wiser to request a credit score report and consider your options for improving your credit score long before you step into the car dealership.

Why Do Lenders Care About Your Credit Score for an Auto Loan?

Lenders care about credit scores because it is in indication of the financial risk they will face by loaning you money, according to myFico, the consumer website of the Fair Isaac Corp. that created the FICO score (the most frequently used credit score). After all, your credit score reveals a number of things about you, such as if you routinely pay your bills on time, if your credit cards are maxed out, and how long you have had credit. Cumulatively, these factors affect your likelihood to make good on the loan, which entails not only paying your car payments on time, but also eventually paying your loan off in full. In short, a borrower with a good credit score equates to less of a financial risk to the lender, and therefore merits a lower interest rate.

The average credit score to buy a car changes periodically, but in the first three months of 2012, the average credit score was 760 for financing a new vehicle and 659 for a used vehicle, according to Fox Business, which cited Experian Automotive’s report on the state of automotive financing. If your credit score is too low, you may not be able to take out a car loan at all from certain lenders, and the lenders that will provide an auto loan will set your interest rate high to compensate. Borrowers with the lowest credit scores ó below 550 ó received average interest rates of about 13% for new cars and 18% for used cars, Fox Business noted. Double-digit interest rates like these can significantly add to the overall cost of your vehicle.

Your Credit Score and Your Monthly Car Payment

Because of its impact on your interest rate, your credit score affects your monthly car payments as well. The three considerations that control how much you pay every month on your car loan include the loan amount, the interest rate you are assigned, and the term of your loan, according to myFico. For a $10,000 loan, a person with an excellent FICO credit score of 720-850 could receive an annual percentage rate (APR) of 4.952%, resulting in a car payment of $293 for a 36-month auto loan, according to myFico’s monthly auto payment calculator. In contrast, a borrower with a poor FICO score of 500-589 could receive an APR of 17.174%, resulting in a car payment of $357 for a 36-month auto loan. While a borrower could lower their monthly payment by stretching out the term of the loan to 48 or even 60 months, they are only adding to the amount of time they will be paying interest, increasing the overall amount they spend on their vehicle.

How to Get the Best Rate

Aside from taking steps to improve your credit score (such as paying your bills on time, reducing your overall debt, and keeping balances low on credit cards), it’s important to shop around for the best rates at credit unions, various dealerships, and even your own bank. Experts recommend shopping around for auto financing before you begin shopping for a new or used car, according to CNN Money. If you enter a car dealership armed with a good auto financing deal after shopping around, the dealership will have an incentive to beat your deal, which can work in your favor, the article explained.